Charitable giving strategies after tax reform

Sunday

Jan 14, 2018 at 3:01 AM

David T. Mayes

While falling well short of simplifying the tax code to the point where we can all file our annual returns on a post card, the Tax Cut and Jobs Act did introduce significant changes for taxpayers who typically itemize their deductions.

The new tax law still computes federal tax due using seven tax brackets, but with reduced rates for all but the lowest (10 percent) bracket which applies to the first $9,525 of taxable income for single filers and $19,050 for married couples who file jointly. While these lower rates should lead to smaller tax bills for most taxpayers, the significant changes made to itemized deductions and the fact that personal exemptions have been eliminated for 2018 will undoubtedly increase the taxable income reported on many taxpayers' returns.

Taking a look down Schedule A of Form 1040, which lists itemized deductions, the most significant changes will appear in the lines reporting state and local taxes paid and miscellaneous itemized deductions. The new law limits the deduction for state and local taxes (income, sales, property and excise) to $10,000 and completely eliminates miscellaneous itemized deductions such as tax preparation fees, investment advisory fees and unreimbursed employee business expenses. Mortgage interest remains deductible on up to $750,000 of debt incurred to buy, build or substantially improve a primary residence, down from the $1 million limit that applied under prior law. Note that this new limit only applies to mortgages taken out after Dec. 15, 2017. Home equity debt not related to the purchase, construction or substantial improvement of a primary residence is no longer deductible.

Gifts to charity remain deductible as long as a taxpayer has enough other itemized deductions for the total to exceed the new standard deductions of $12,000 for single filers and $24,000 for married couples. In fact, the new law increased the previous cap that limited the deduction for cash charitable contributions to 50 percent of the taxpayer's adjusted gross income (AGI). Now, cash contributions to public charities of up to 60 percent of AGI will be deductible.

Because the higher standard deduction and new limits on itemized deductions are designed so that fewer taxpayers will actually itemize, charities have undoubtedly been concerned that the new, "simpler" tax code will discourage charitable giving. But, there are still ways for taxpayers to make gifts to charity and reap some tax advantages.

First, for taxpayers whose itemized deductions will come close to exceeding the standard deduction can consider bunching two or more years of charitable contributions into a single tax year such that their total itemized deductions exceed the standard deduction amount. Note that this approach might also be an effective way to handle state and local tax payments such as estimated income tax or billed property tax payments when there is some flexibility to make the payment in a subsequent tax year. Under this approach, taxpayers may be able to alternate between using the standard deduction and itemizing from year to year.

Bunching contributions into larger, less frequent donations, however, could negatively impact your favorite charities since these organizations count on a stable annual funding to support their programs. This concern can be alleviated by making contributions to a donor advised fund – an investment account managed by a non-profit entity for the purpose of charitable giving. These accounts are designed specifically to allow taxpayers to garner a current-year tax deduction for future charitable contribution. Donors can choose the charity that will ultimately benefit from their gifts and undistributed funds are invested on a tax-free basis.

Another option for obtaining tax benefits from charitable gifts is to make contributions directly from an IRA if you are over age 70½ and subject to the IRA required minimum distribution rules. The new tax law preserved the ability for retirees to make qualified charitable distributions (QCD) from their IRAs, which means that funds sent from an IRA to a qualifying charity are not included in gross income, but still count toward satisfying the required minimum distribution for the year. Unfortunately, it is not possible to direct a QCD to a donor advised fund because QCDs must go to operating charities and donor advised funds fall outside of this definition. However, it is certainly okay to take a taxable IRA withdrawal, deposit the cash into a donor advised fund and take an itemized deduction for the charitable contribution.

David T. Mayes is a Certified Financial Planner professional and IRS Enrolled Agent at Bearing Point Wealth Partners, Inc., a fiduciary financial planning firm in Hampton. He can be reached at (603) 926-1775 or david.mayes@bearingpointwealth.com.

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